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Thursday October 17, 2013 5:15 AM

Globalization isn’t what it used to be. In its heyday, trade and international investment (“
capital flows”) boomed. Consider: From 1980 to 2007, the value of global exports increased by
nearly sevenfold, reports the World Trade Organization. As for capital flows, the annual amounts
rose from $500 billion to $11.8 trillion over the same period, estimates the McKinsey Global
Institute.

New middle classes emerged. Hundreds of millions of people escaped abject poverty. All this
seemed a real-world triumph of economic theory. Trade allowed countries to specialize in what they
did best. Liberalized capital enabled investment to seek the highest returns.

Times have changed. Globalization hasn’t been repealed, but it has entered a more cautious and
regulated phase. We’re creating a “gated globe,” argues Greg Ip, the U.S. economics editor of
The Economist, in a masterful analysis. “Walls have been going up” to the free flow of
trade and money, he writes. But the walls have “gates” that countries can open or close as they
please. “Governments increasingly pick and choose whom they trade with, what sort of capital they
welcome and how much freedom they allow (firms) for doing business abroad.” The private sector also
embraces restraint; multinational firms have become more selective in their global commitments.

This is most obvious in finance. According to McKinsey, international capital flows in 2012 were
still only 60 percent of their 2007 peak. Much of the pullback occurred in Europe, where banks had
dramatically increased cross-border loans. Unfortunately, this contributed to Europe’s economic
crisis. Cheap credit enabled debtor countries — Greece, Spain, Portugal, Ireland — to underwrite
housing booms and government deficits. Chastened European banks are now shedding risky credits and
rebuilding capital, which acts as a buffer against losses.

Global capital flows are recognized as a double-edged sword. “They can fuel borrowing booms,
especially in countries with underdeveloped financial systems, leading to devastating busts when
the money flows out,” writes Ip. Countries try to suppress surges of short-term “hot money,”
chasing higher interest rates or stock market returns. Case in point: Brazil. In 2009, facing a
flood of foreign money, it imposed a 2 percent tax on foreign purchases of its stocks and bonds.
The rate was later raised to 6 percent and then suspended when foreign funds began leaving Brazil.
The point was to smooth erratic flows in both directions.

Trade liberalization has also weakened, albeit more gradually. Worldwide negotiations, with the
lower tariffs and trade concessions applying to almost everyone, have flagged. The latest round,
begun in Doha, Qatar, in 2001, remains stalemated. Meanwhile, countries have resorted to regional
deals (such as the North American Free Trade Agreement among the United States, Canada and Mexico),
and trade is distorted by a variety of policies, from rigged exchange rates (China) to subsidized
export loans (many nations).

Globalization reflects three basic forces: lower transportation costs (containerization, air
freight); cheaper communications (phone service, the Internet); and favorable government policies.
The first two are permanent; the third isn’t. What Ip calls “gated” globalization might also be
described as “a la carte.” Countries want to pick and choose — to take what helps and reject the
rest. This is understandable, but is it viable? Can globalization coexist with rising nationalism?
Can it overcome the rivalry between the United States and China?

With slow economic growth — caused in part by faltering globalization — mutual suspicions
intensify. On both sides, there’s ample ground for mistrust. Many American companies see themselves
as victims of unfair competition in China and in export markets. “China has long used compulsory
joint ventures, technology transfer and access to cheap land and loans from state-owned banks to
boost companies in strategic sectors,” writes Ip. And China isn’t alone in giving its companies
preferential treatment.

On the other hand, China and many nations view the United States as destabilizing the global
economy. First came the 2008-09 financial crisis. Now there’s the threat of a default. America is
supposed to fortify confidence; instead, it does the opposite.

Globalization has always had its dissenters, most understandably among workers whose jobs were
lost or wages depressed by international competition. But their grievances were muffled by solid
overall economic growth. Now the opposite may happen: Slow growth may amplify complaints against
globalization. The danger is that governments around the world, trying to shield themselves against
globalization’s vices, will cripple its virtues.